The risk-free rate of return, rRF , is 10%; the needed rate of return on the market, rM, 16%; and Schuler Company's stock has a beta coefficient of 1.6.
a. If the dividend expected during the coming year, D1, is $2.50, and if g is a constant 1.75%, then at what price should Schuler's stock sell?
b. Now, assume the Federal Reserve Board enhances the money supply, causing a fall in the risk-free rate to 5% and rM to 12%. How would this affect the price of the stock?
c. In addition to the change in part b, assume investors' risk aversion declines; this fact, combined with the decline in rRF, causes rM to fall to 8%. At what price would Schuler's stock sell?
d. Assume Schuler has a change in management. The new group institutes policies that enhance the expected constant growth rate to 6%. Also, the new management stabilizes sales and profits, and therefore causes the beta coefficient to decline from 1.6 to 0.9. Suppose that rRF and rM are equal to the values in part c. After all these changes, what is Schuler's new equilibrium price?